PBMs, drug distributors don’t fret Amazon.com, execs say

Provided exclusively by Mergermarket, an Acuris Company

The potential for Amazon.com [NASDAQ:AMZN] to enter the drug distribution market is not causing grave concerns among major pharmacy benefits managers (PBMs) and distributors, CEOs said at the JPMorgan Healthcare Conference this week.

There has been widespread recent speculation that the Seattle-based e-commerce giant could disrupt the market for prescription pharmaceuticals and drive down prices and profits for the PBMs, which act as middlemen between pharmaceutical companies, payers and patients.

This news service reported in December that if Amazon does go after the drug industry it would likely enter through the high-margin PBM area. The largest pharmacy chain in the US, CVS Health [NYSE:CVS], reportedly is buying health insurer Aetna [NYSE:AET] for USD 69bn in part in response to Amazon’s potential plans.

Amazon has declined to comment on the frequent speculation, other than to say it has obtained wholesale pharmacy licenses in various states to sell professional-use medical products through its distribution network.

Executives with Express Scripts [NASDAQ:ESRX], McKesson [NYSE:MCK], Walgreens Boots Alliance [NASDAQ:WBA] and Humana [NYSE:HUM], which operates the fourth-largest PBM, all said it would be a major challenge for Amazon to get a sizable foothold into the drug supply business and predicted the technology company will avoid the market.

Tim Wentworth, CEO of Express Scripts, a PBM that provides drug benefits to around 100m patients, said Amazon’s business model to date has been to supply products at a low cost, while PBMs provide extensive management and analytics services to determine the best course of care for patients on behalf of insurance companies and health plans.

“They are in the fulfillment business,” said Wentworth referring to Amazon in an interview on the sidelines of the conference, held in San Francisco. “They have never been in the management business. There are a lot of attributes of what we do that go beyond low-unit prices. They are more like a GPO (group purchasing organization).”

Wentworth acknowledged that Amazon could purchase a PBM to enter the market but expressed doubt that it would consider such a move, which he said would run contrary to its business strategies to date that involves low cost supply and distribution of products, without any sales force or analytics operations.

Similarly, Humana CEO Bruce Broussard said he is “not at all” concerned about any potential threat of Amazon entering the PBM market. Humana operates the fourth largest PBM, supplying some 425m prescriptions to consumers in the last year.

In an interview after a presentation to the conference, Broussard said his business is more about driving memberships through its health insurance plans, a large portion of which is in Medicaid Advantage plans, for which drug plans are integrated. Any Amazon move would involve simple substitution to lower cost pharmaceuticals, which would not be a threat to its business, he said.

John Hammergren, CEO of McKesson, one of the largest drug distribution companies, also downplayed any Amazon threat, telling investors that its business involves far more than online sales and distribution of the kind that Amazon has offered to date.

With Amazon, “you will never find 250,000 products online, delivered the next day, supported by sales reps that deal with an array of issues” that McKesson provides, said Hammergren. He said Amazon could be a threat to a small portion of its business in the sale of non-complex products like examination gloves or toothpaste, but not a significant threat to the vast majority of McKesson’s business.

Similarly, Walgreens Boots Alliance CEO Stefano Pessina told investors that “we don’t believe that Amazon will come significantly into the market in the next few years. Even if they did, we would not change our model. I am not particularly concerned about it.”

“The only way for them to enter the market is to buy something,” said Pessina, saying the threat is “exaggerated.” “They are substantially a technology company,” said Pessina.

by Dane Hamilton in San Francisco

As seen in the Mergermarket newsletter on 10/01/2018

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